Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains forward-looking statements. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements contained herein. When used in this report, the words "anticipate," "believe," "estimate," "expect" and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. Actual results, performance or achievements could differ materially from the results expressed in, or implied by these forward-looking statements. Readers should be aware of important factors that, in some cases, have affected, and, in the future, could affect actual results, and may cause actual results for the three months and nine months ended September 30, 2018 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. These factors include without limitation, the ability to obtain capital and other financing in the amounts and at the times needed to complete clinical trials and launch new products, market acceptance of new products, the nature and timing of regulatory approvals for both new products and existing products for which the Company proposes new claims, realization of forecasted revenues, expenses and income, initiatives by competitors, price pressures, failure to meet FDA regulated requirements governing the Company’s products and operations (including the potential for product recalls associated with such regulations), risks associated with initiating manufacturing for new products, failure to meet Foreign Corrupt Practice Act regulations, legal proceedings, and other risk factors listed from time to time in our SEC reports, including, in particular, those set forth in Cesca’s 2017 Transition Report on Form 10-K for the transition period ended December 31, 2017.
Cesca develops and commercializes a range of automated technologies for cell-banking, cell-processing, and cell-based therapeutics. Since the 1990’s Cesca has been the pioneer and leading provider of automated systems that isolate, purify and cryogenically store units of hematopoietic stem and progenitor cells for the cord blood banking industry. In July 2017, Cesca’s subsidiary, ThermoGenesis Corp. (ThermoGenesis), completed a strategic acquisition of the business and substantially all of the assets of SynGen Inc. (SynGen), a research and development company for automated cellular processing, and after the SynGen acquistion, Cesca’s device business together with the business acquired from SynGen is owned and operated by ThermoGenesis.
Following the acquisition of SynGen we combined the technologies from both companies to develop a novel proprietary CAR-TXpress™ platform that addresses the critical unmet need for better efficiency and cost-effectiveness for the emerging immune-oncology field, in particular, the chimeric antigen receptor T cell (CAR-T) market. Since the first quarter of 2018, the Company developed and launched three X-Series™ products which provide superior performance in the processing of immunotherapy drugs: X-Lab™, X-Wash™, and X-BACS™.
In June 2018, we undertook a restructuring initiative to reduce our operating expenses. The restructuring resulted in a reduction of approximately 25% of the Company’s workforce in various functions. This action, combined with other cost savings initiatives is expected to reduce annual operating costs by approximately $2,500,000. We incurred a restructuring charge of $260,000 during the second quarter of fiscal 2018, and $36,000 during the third quarter of fiscal 2018, recorded as a component of general and administrative expense.
Cesca now has two separately reported business segments: A “Device Segment” and a “Clinical Development Segment.” The Device Segment develops and commercializes automated systems that provide GMP, clinical grade cell-banking, cell-processing, and cell-based therapeutics commercialized by Cesca’s ThermoGenesis subsidiary. The Clinical Development Segment is developing autologous (utilizing the patient’s own cells) cell-based therapeutics that address significant unmet medical needs for the vascular, cardiology and orthopedic markets.
Cesca’s Device Segment
Cesca’s Device Segment offers automated devices and technologies for cell-banking, point-of-care applications, and cell-processing. The automated solution offerings include:
AutoXpress Platform for
Clinical BioBanking
Applications,
which
provides automated isolation, harvest, controlled-rate freezing and cryogenic storage of cord blood stem and progenitor cells for treatment of patients in need, and includes the following products:
AX
P
™
System
–
The innovative AXP™ System defines a new processing standard for isolating and retrieving over 97% of the stem and progenitor cells from collections of umbilical cord blood in an automated, fully closed, sterile system in 30 minutes. AXP™ is self-powered, microprocessor-controlled, and contains flow control optical sensors to achieve precise separation
BioArchive
™
Cryopreservation
System
–
The BioArchive® Cryopreservation System is the industry’s leading, fully automated, robotic, liquid nitrogen controlled-rate-freezing (CRF) and cryogenic storage system for stem cell samples and clinical products. Using proven, computer-controlled technology, it provides the ultimate performance and protection for today’s invaluable cord blood samples and future cell therapeutic products. BioArchive® is the preferred system for the highest quality cord blood banks worldwide. A complete technical Master-File has been provided to the FDA to support those highest quality cord blood banks who have been able to qualify for, and obtain, a Biological License from the FDA to allow their cord blood units to be used to treat patients with blood cancers.
POCXpress Platform for
Point-of-Care
Applications
allows for the rapid, automated processing of autologous peripheral blood or bone marrow aspirate derived stem cells at the point-of-care, such as surgical centers or clinics includes the following products:
M
X
P
™
System
–
Built based on similar technology as our proprietary AXP™ System, MXP™ is an automated, fully closed, sterile system that volume-reduces bone marrow to a user-defined volume in less than 1 hour, while retaining over 90% of the MNCs. The MXP™ is self-powered, microprocessor-controlled, and contains flow control optical sensors to achieve precise separation.
PXP
™
System
–
The PXP™ System is our newly launched point-of-care device. PXP™ is an automated, closed system that harvests a precise volume of cell concentrate from bone marrow aspirates. PXP™ can generate a concentration of bone marrow in less than 20 minutes, with consistently high MNC and CD34
+
stem cell progenitor recovery rates and greater than 98% depletion of contaminating red blood cells (RBCs). Processing data is captured using our proprietary DataTrak™ software to assist with Good Manufacturing Practice (GMP) process monitoring and reporting information.
CAR-TXpress Platform for
Immuno-Oncology Applications
addresses the critical unmet need for chemistry, manufacturing and controls (CMC) improvement of the emerging CAR-T therapies for cancer patients. CAR-TXpress
™
eliminates the need of using the labor intensive and “open system” ficoll MNC purification process and traditional magnetic bead T-Cell selection process, thereby dramatically reducing processing time and increasing efficiency of the manufacturing process, which should reduce the overall manufacturing cost. The CAR-TXpress platform includes the following X-Series products:
X-Lab™ System for Cell Isolation –
a semi-automated, functionally-closed, ficoll-free, system for the rapid isolation of mononuclear cells (MNCs) with, or without, platelets from collected units of peripheral blood, cord blood, bone marrow aspirate or leukapheresis. On November 13, 2018 the Company announced that ThermoGenesis has filed a Device Master File (MAF) with the FDA for the X-LAB. The MAF contains all the relevant information that the FDA will need to allow principal investigators to include Cesca’s systems in their investigational new drug applications.
X-BACS
™
System
for Cell
Purification
–
a semi-automated, functionally-closed system employs a microbubble/antibody reagent to isolate target cells by buoyancy-activated cell sorting (BACS). These microbubble/antibody reagents bind to user-selected target cells to increase their buoyancy and provide a complete separation from non-target cells during centrifugation and allowing the harvest of a highly-purified population of target cells, with high recovery efficiency and cell viability.
X-Wash
®
System
for
W
ashing and
R
eformulation –
a semi-automated, functionally-closed system that separates, washes, and volume-reduces units of fresh or thawed units of blood, bone marrow, leukapheresis or cell cultures and presents these washed cells in a predetermined small volume.
Cesca’s Clinical Development Segment
Using our proprietary automated point-of-care cellular processing technologies, Cesca’s Clinical Development Segment is developing autologous (utilizing the patient’s own cells) stem cell-based therapeutics that will address significant unmet medical needs for the vascular, cardiology and orthopedic markets that include:
VXP
®
for
Critical Limb Ischemia (CLI) –
Cesca has a proprietary point-of-care, autologous stem cell-based therapy under development which is intended for the treatment of patients with CLI. The FDA has cleared the Company to proceed with a 362 subject, multi-center pivotal Phase III CLIRST study, which is designed to evaluate the safety and efficacy of Cesca’s autologous stem cell-based therapy in patients with no-option or poor option late stage CLI. Previous clinical studies using Cesca’s proprietary, point-of-care-technologies have demonstrated the regeneration of blood vessels and improved blood circulation in the limbs, using a patient’s own bone marrow derived stem cells.
VXP
®
for
Acute Myocardial Infarction
– Cesca has a proprietary, point-of-care autologous stem cell-based therapy under development which is intended as an adjunct treatment for patients who have suffered an acute STEMI, the most serious type of heart attack. Such treatments are aimed at minimizing the adverse remodeling of the heart post-STEMI.
P
XP for
Orthopedics – Osteoarthritis (OA) -
Cesca is in early stage development of an autologous stem cell based therapy intended to treat patients with cartilage tissue degeneration that may lead to progressive cartilage loss and painful joint diseases. Localized articular cartilage defects can potentially be repaired by transplantation of autologous cell therapy. Therapies in development using Cesca’s proprietary PXP
system are expected to delay further deterioration and repair the damaged joint cartilage. Treatment is typically via a single procedure in the hospital or clinic.
Critical Accounting Policies
Management’s discussion and analysis of its financial condition and results of operations is based upon the condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a full discussion of our accounting estimates and assumptions that have been identified as critical in the preparation of the Company’s condensed consolidated financial statements, please refer to Cesca’s 2017 Transition Report on Form 10-K for the transition period ended December 31, 2017.
Res
ults of Operations for the
Three
Months Ended
September
30
, 2018
as Compared to the
Three
Months Ended September 30, 2017
Net Revenues
Consolidated net revenues for the three months ended September 30, 2018 were $3,113,000, compared to $3,069,000 for the three months ended September 30, 2017, an increase of $44,000. The increase in Device Segment revenues is primarily driven by new customers adoption our CAR-TXpress products. Clinical development revenues consist of sales generated by our Totipotent subsidiary. The decline in revenue is primarily due to lower storage of cord blood at the Novacord cord blood bank.
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Device Segment:
|
|
|
|
|
|
|
|
|
AXP
|
|
$
|
1,466,000
|
|
|
$
|
1,421,000
|
|
BioArchive
|
|
|
799,000
|
|
|
|
1,117,000
|
|
Manual Disposables
|
|
|
254,000
|
|
|
|
334,000
|
|
CAR-TXpress
|
|
|
517,000
|
|
|
|
60,000
|
|
Other
|
|
|
23,000
|
|
|
|
11,000
|
|
|
|
|
3,059,000
|
|
|
|
2,943,000
|
|
Clinical Development Segment:
|
|
|
|
|
|
|
|
|
Manual Disposables
|
|
|
8,000
|
|
|
|
7,000
|
|
Bone Marrow
|
|
|
40,000
|
|
|
|
92,000
|
|
Other
|
|
|
6,000
|
|
|
|
27,000
|
|
|
|
|
54,000
|
|
|
|
126,000
|
|
|
|
$
|
3,113,000
|
|
|
$
|
3,069,000
|
|
Gross Profit
The Company’s gross profit was $655,000 or 21% of net revenues for the three months ended September 30, 2018, compared to $931,000 or 30% for three months ended September 30, 2017. The decrease in gross profit is primarily driven by higher overhead costs and lower overhead absorption due to reduced procurement.
Sales and Marketing Expenses
Consolidated sales and marketing expenses were $364,000 for the three months ended September 30, 2018, as compared to $517,000 for the three months ended September 30, 2017, a decrease of $153,000 or 30%. The decrease was in the Device Segment and driven by reduced consultant fees incurred during the transition of the SynGen operations.
Research and Development Expenses
Consolidated research and development expenses were $611,000 for the three months ended September 30, 2018, compared to $1,063,000 for the three months ended September 30, 2017, a decrease of $452,000 or 43%. The decrease in research and development expenses occurred in both segments primarily due to a decrease in personnel costs as a result of the June 2018 reduction in force.
General and Administrative Expenses
Consolidated general and administrative expenses for the three months ended September 30, 2018 were $1,615,000, compared to $1,701,000 for the three months ended September 30, 2017, a decrease of $86,000 or 5%. The decrease is primarily due to fees associated with the June 30, 2017 audit incurred in the quarter ending September 30, 2017. As the Company has transitioned to a December 31 year-end there was no audit performed as of June 30, 2018.
Res
ults of Operations for the Nine
Months Ended
September 30
, 2018 as Compared to the Nine Months Ended September 30, 2017
Net Revenues
Consolidated net revenues for the nine months ended September 30, 2018 were $6,984,000 compared to $9,822,000 for the nine months ended September 30, 2017, a decrease of $2,838,000 or 29%. Device Segment revenues decreased in the AXP product line primarily due to the distributor change in the China market. BioArchive device sales decreased due to three less device sales and other decreased due to the ending of a royalty payment agreement in the prior year. The decreases were offset by an increase in our CAR-TXpress products driven by the adoption of the products by new customers. Clinical development revenues consist of sales generated by our Totipotent subsidiary. Manual disposables decreased due to the loss of Totipotent’s primary customer for manual disposables at the end of 2017 and other declined due to lower storage of cord blood at the Novacord cord blood bank.
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Device Segment:
|
|
|
|
|
|
|
|
|
AXP
|
|
$
|
3,131,000
|
|
|
$
|
5,321,000
|
|
BioArchive
|
|
|
2,326,000
|
|
|
|
2,939,000
|
|
Manual Disposables
|
|
|
716,000
|
|
|
|
778,000
|
|
CAR-TXpress
|
|
|
547,000
|
|
|
|
60,000
|
|
Other
|
|
|
102,000
|
|
|
|
342,000
|
|
|
|
|
6,822,000
|
|
|
|
9,440,000
|
|
Clinical Development Segment:
|
|
|
|
|
|
|
|
|
Manual Disposables
|
|
|
31,000
|
|
|
|
77,000
|
|
Bone Marrow
|
|
|
101,000
|
|
|
|
184,000
|
|
Other
|
|
|
30,000
|
|
|
|
121,000
|
|
|
|
|
162,000
|
|
|
|
382,000
|
|
|
|
$
|
6,984,000
|
|
|
$
|
9,822,000
|
|
Gross Profit
The Company’s gross profit was $1,370,000 or 20% of net revenues for the nine months ended September 30, 2018, compared to $3,836,000 or 39% for nine months ended September 30, 2017. The decrease in gross profit is primarily driven by higher overhead costs due to the SynGen acquisition and lower overhead absorption due to reduced procurement.
Sales and Marketing Expenses
Consolidated sales and marketing expenses were $1,048,000 for the nine months ended September 30, 2018, as compared to $1,273,000 for the nine months ended September 30, 2017, a decrease of $225,000 or 18%. The decrease was in the Device Segment and driven by consultant fees incurred during the prior year for the transition of the SynGen operations.
Research and Development Expenses
Consolidated research and development expenses were $2,560,000 for the nine months ended September 30, 2018, compared to $2,196,000 for the nine months ended September 30, 2017, an increase of $364,000 or 17%. The increase is driven by fees paid to regulatory consultants and costs associated with developing new protocols for the X-Series technologies.
General and Administrative Expenses
Consolidated general and administrative expenses for the nine months ended September 30, 2018 were $6,256,000, compared to $6,302,000 for the nine months ended September 30, 2017, a decrease of $46,000. The decrease is driven by reduced legal expenses primarily due to settlement of the SynGen litigation in the prior year.
Impairment Charges
The Company incurred impairment charges of $27,202,000 during the nine months ended September 30, 2018 as compared to impairment charges of $0 during the nine months ended September 30, 2017. During the three months ended June 30, 2018, the Company experienced a significant and sustained decline in its stock price resulting in its market capitalization falling significantly below the recorded value of its consolidated assets. The Company performed a quantitative assessment which determined that the carrying amount for the Company’s goodwill and indefinite lived intangible assets relating to the clinical protocols exceeded its estimated fair value. As a result, impairment charges of $12,695,000 to goodwill and $14,507,000 to intangible assets were recorded to the Clinical Development Segment.
Benefit for Income Taxes
The income tax benefit increased to $3,451,000 in the nine months ended September 30, 2018 as compared to $673,000 in the nine months ended September 30, 2017. The increase was due to the impairment of the indefinite lived intangible assets for the clinical protocols and goodwill. The Company’s deferred tax liability is tied to the intangible assets and goodwill. The impairment caused the deferred tax liability to decrease from $4,730,000 to $1,279,000, which resulted in an income tax benefit for the period.
Liquidity and Capital Resources
At September 30, 2018, the Company had cash and cash equivalents of $2,220,000 and working capital of $3,627,000. This compares to cash and cash equivalents of $3,513,000 and working capital of $5,990,000 at December 31, 2017. We have primarily financed operations through private and public placement of equity securities and our line of credit facility.
On August 28, 2018, the Company completed a private placement transaction with an accredited investor, in which the Company sold 1,000,000 shares of Common Stock for a purchase price of $0.18 per share and 2,965,000 pre-funded warrants for a purchase price of $0.17 per pre-funded warrant. Each pre-funded warrant is immediately exercisable for one share of Common Stock at an exercise price of $0.01 per share and will remain exercisable until exercised in full. The Company received $684,000 in gross proceeds, net proceeds of $623,000 after deducting offering expenses of $61,000. As of September 30, 2018, none of the pre-funded warrants issued in the August 2018 private placement have been exercised.
On May 18, 2018, the Company completed a public offering of 6,475,001 units (the “Units”) and 2,691,666 pre-funded units (the “Pre -Funded Units”) for a purchase price of $0.60 per unit, resulting in aggregate gross proceeds of approximately $5,500,000, and net proceeds of $4,819,000 after deducting offering expenses of $681,000. Each Unit consisted of one share of Common Stock, and one common warrant to purchase one share of Common Stock, and each Pre-Funded Unit consisted of one pre-funded warrant to purchase one share of Common Stock and one common warrant to purchase one share of Common Stock. The common warrants included in the Units and Pre-Funded Units were immediately exercisable at a price of $0.60 per share of Common Stock, subject to adjustment in certain circumstances, and will expire five years from the date of issuance. As of June 30, 2018, all 2,691,666 Pre-Funded Units issued in the May 2018 public offering have been exercised.
The Company has a Revolving Credit Agreement with Boyalife Asset Holding II, Inc. As of September 30, 2018, the Company had drawn down $7,200,000 of the $10,000,000 available under the Credit Agreement. Boyalife Asset Holding II, Inc. is a wholly owned subsidiary of Boyalife Group Inc., which is owned and controlled by the Company’s Chief Executive Officer and Chairman of the Board.
The Company has incurred recurring operating losses and as of September 30, 2018 had an accumulated deficit of $220,276,000. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date. The Company anticipates requiring additional capital to grow the device business, to fund other operating expenses and to make interest payments on the line of credit with Boyalife. The Company’s ability to fund its cash needs is subject to various risks, many of which are beyond its control. The Company plans to seek additional funding through bank borrowings or public or private sales of debt or equity securities or strategic partnerships. The Company cannot guarantee that such funding will be available on a timely basis, in needed quantities or on terms favorable to us, if at all.
Off-Balance Sheet Arrangements
As of September 30, 2018, the Company had no off-balance sheet arrangements.